Credit card debt can quickly become an overwhelming problem for consumers with poor fiscal discipline. With exorbitant interest rates and fees, credit card companies pad their pockets each year. Exiting from excessive credit card debt requires strict budgeting and a strong desire to become free. In some cases, debt cancellation is the only viable option. It's important to remember, however, that debt cancellation will leave your credit report negatively stained for at least seven years.
Pull a recent copy of your credit report. See Resources for a way to get a free copy of your report. Review all debts listed on your report. Debt cancellation agencies--debt settlement firms--usually will not cancel debts unless you are absolutely swimming in debt.
Calculate your debt-to-income ratio (DIR). Often, firms will not cancel debts unless your ability to repay your debts on your own is impossible. To figure your DIR, divide your monthly expenses by your gross monthly income. Most firms will require at least a 55 percent DIR prior to debt cancellation.
Decide which debt is the most costly or burdensome. It's best to not settle all debts: The more debt you eliminate, the more your credit score will drop. (Also, you may be on the hook for taxes if you cancel debts. Unpaid debt is sometimes considered income and therefore is taxable.)
Contact a debt settlement agency that will help settle and cancel your debt. It's best to begin this search at the National Foundation for Credit Counselors. This agency accredits individual credit counselors across the nation. Only the most ethical and fair agencies qualify for membership. See Resources for the NFCC.
Prepare for a battle with the creditor in question. Creditors often do not want to cancel a debt--obviously it affects their bottom line. Your credit counselor will help you prepare and refine an argument for debt cancellation. It's best to have a sound reason for cancellation, such as a medical emergency or sudden unemployment.
Make sure to get any debt cancellation or settlement offer in writing prior to agreeing to terms. Get the agreement in writing and review it with your credit counselor and another trusted adviser, such as a personal attorney or accountant. Only agree to the terms if you're comfortable with the settlement.
Speak with your accountant to review the tax consequences of the cancellation. You may be on the hook for additional taxes.
Based in Eugene, Ore., Duncan Jenkins has been writing finance-related articles since 2008. His specialties include personal finance advice, mortgage/equity loans and credit management. Jenkins obtained his bachelor's degree in English from Clark University.